US inflation fears ease as PPI drops

GOOD NEWS The US economy began the year on a good footing, with a decline in the Producer Price Index, mild inflation and a recovery in the manufacturing sector

AP , WASHINGTON

Easing fears about inflation in the US, wholesale prices fell by the largest amount in 20 months in December, aided by a big decline in the cost of energy.

In other good economic news, output at the US' beleaguered manufacturing companies rose strongly last month, helping factories enjoy their first annual increase in output since 2000.

Analysts said Friday's reports depicted an economy that began the new year on a good footing with mild inflation and signs of strength in the long-suffering manufacturing sector, which has seen the loss of 2.7 million jobs over the past four years.

"These are very positive reports showing solid production at year's end with moderating inflation," said Mark Zandi, chief economist at Economy.com.

The Labor Department's Producer Price Index, which tracks inflation before it reaches the consumer, posted a decline of 0.7 percent last month as gasoline and other energy prices plunged by 4 percent, the biggest drop since April 2003.

Meanwhile, the Federal Reserve said industrial production rose by 0.8 percent in December, far above the modest 0.2 percent rise in November. Manufacturing production was up 0.7 percent during the month while output at utilities rose by 2.7 percent and mining saw a 0.4 percent increase.

For the year, industrial production rose by 4.1 percent, the best showing since 2000 and a sharp turnaround from the past three years when production either fell or was flat.

"Manufacturing has finally broken out of its slump," said David Huether, chief economist at the National Association of Manufacturers, noting that last year's rebound was broad-based with growth in 16 of 19 major industries.

Huether predicted further strong gains in factory output this year as businesses boost capital spending and the decline in the value of the dollar against other currencies helps to boost exports.

However, David Wyss, chief economist at Standard & Poor's in New York, noted that the trade deficit is still worsening as domestic manufacturers continue to be battered by imports.

"I think we are through the worst of manufacturing's troubles although we are still not seeing much in the way of actual strength, especially in employment growth," he said.

The better-than-expected 0.7 percent drop in wholesale prices last month, the biggest decline since a 1.5 percent fall in April 2003, followed sharp increases of 1.7 percent in October and 0.5 percent in November, gains that were propelled by skyrocketing energy prices.

The 4 percent drop in energy prices in December reflected unusually warm weather, especially in the Northeast where there is a heavy reliance on home heating oil.

But analysts cautioned that energy prices rebounded again this week amid worries about upcoming cold weather, the turmoil in Iraq and a dip in crude oil and heating oil inventories.

For all of last year, wholesale prices rose by 4.1 percent, up slightly from a 4 percent increase in 2003. Both years recorded the biggest wholesale inflation increases since a 5.7 percent surge in 1990, another year when turmoil in the Middle East sent world oil prices soaring.

Outside of the volatile energy and food sectors, inflation was better behaved with the so-called core rate of wholesale inflation rising by just 2.2 percent last year, up from a 1 percent increase in 2003.

Analysts said the performance of core inflation should satisfy Federal Reserve policy-makers that despite the jump in energy prices last year, inflation is not threatening to get out of control. Many economists predicted that the Fed would keep raising interest rates at a moderate pace of quarter-point moves this year.